UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                      WASHINGTON, D.C.  20549
                             FORM 10-K

(Mark One)
[X]  Annual Report Pursuant to Section 13 or 15(d) of The Securities
     Exchange Act of 1934 for the Fiscal Year Ended December 31,2000 or

[  ]  Transition Report Pursuant to Section 13 or 15(d) of the
      Securities Exchange Act of 1934 for the transition period
      from __________ to __________

                  Commission File Number: 0-17969

                            NEXTHEALTH, INC.
        ----------------------------------------------------
       (Exact Name of Registrant as Specified in its Charter)

   Delaware                                            86-0589712
------------------                             --------------------------
(State or Other Jurisdiction of           (I.R.S. Employer Identification No.)
Incorporation or Organization)

16600 N. Lago Del Oro Parkway, Tucson, Arizona                     85739
----------------------------------------------                     -----
(Address of Principal Executive Offices)                        (Zip Code)

                                (520) 818-5800
           ---------------------------------------------------
           (Registrant's Telephone Number, including Area Code)

Securities registered pursuant to Section 12(b) of the Act: Common
Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
[ X ] YES   [   ] NO

On March 1, 2001, the aggregate market value of voting common stock
held by non-affiliates of the registrant was $27,910,252  based on
the closing price of the registrant's common stock as reported on The
Nasdaq Stock Market on such date.  For purposes of the preceding
sentence only, all directors and executive officers of the registrant
are assumed to be affiliates.

On March 1, 2001, there were 8,636,263 shares of the registrant's
Common Stock outstanding.

                DOCUMENTS INCORPORATED BY REFERENCE

The information required by Part III of this Report (Items 10, 11, 12
and 13) is incorporated by reference from the registrant's proxy
statement to be filed pursuant to Regulation 14A with respect to the
annual meeting of stockholders which has not yet been scheduled.

Indicate by check mark if disclosure of delinquent filers to Item 405
of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]

Reference is made to the listing beginning on page 35 of all exhibits
filed as a part of this report.

<PAGE>

                         TABLE OF CONTENTS

PART I                                                              Page

  Item 1.  Business..............................................      3
  Item 2.  Properties............................................      6
  Item 3.  Legal Proceedings.....................................      6
  Item 4.  Submission of Matters to a Vote of Security Holders...      6

PART II

  Item 5.  Market for Registrant's Common Equity and Related
            Shareholder Matters..................................      7
  Item 6.  Selected Financial Data...............................      8
  Item 7.  Management's Discussion and Analysis of Financial
            Condition and Results of Operations..................      9
  Item 7A. Quantitative and Qualitative Disclosure About
            Market Risk..........................................     14
  Item 8.  Financial Statements and Supplementary Data...........     15
  Item 9.  Changes in and Disagreements with Accountants on
            Accounting and Financial Disclosure..................     33

PART III

  Item 10. Directors and Executive Officers of the Registrant....     34
  Item 11. Executive Compensation................................     34
  Item 12. Security Ownership of Certain Beneficial Owners
            and Management.......................................     34
  Item 13. Certain Relationships and Related Transactions........     34

PART IV

  Item 14. Exhibits, Financial Statement Schedules and
            Reports on Form 8-K..................................     35

<PAGE>

                               PART I

ITEM 1.  BUSINESS

NextHealth, Inc.

     NextHealth, Inc. (the "Company") is a leading provider of
alternative health care services which focus on prevention and self
care. For over 15 years, the Company has provided effective programs
and services which address individual wellness and quality-of-life
issues through a whole person, mind-body approach. The Company's two
subsidiaries, Sierra Tucson, an addictions and behavioral healthcare
center, and Miraval, a luxury health  resort and spa, are
acknowledged leaders in their respective fields and together define
an important market niche in the healthcare industry.

     NextHealth, Inc., formerly Sierra Tucson Companies, Inc., was
incorporated in Delaware in August 1989 and, as the result of a
merger effective in September 1989, is the successor to an Arizona
corporation which was originally formed in 1983.  In September 1995,
the Company changed its name to NextHealth, Inc., to reflect an
expanded scope of operations as well as to establish separate
identities for the parent company and each of its subsidiaries. The
Company currently operates therapeutic treatment programs as well as
lifestyle management and self-awareness programs pursuant to a
business strategy which concentrates on identifying emerging revenue
and growth opportunities.

     The Company operates in two distinct business segments which are
located at separate facilities in the foothills of the Santa Catalina
Mountains northwest of Tucson, Arizona.  The Treatment segment,
Sierra Tucson, LLC, a Delaware limited liability company ("ST, LLC"),
owns Sierra TucsonTM ("Sierra Tucson"), an inpatient, state licensed,
special psychiatric hospital and behavioral health care center
providing treatment for substance abuse and a broad range of mental
health and behavioral disorders. The Health and Leisure segment,
Sierra Health-Styles, Inc., a Delaware corporation ("Healthstyles,
Inc."), owns MiravalTM ("Miraval"), a luxury health resort and spa
which provides a unique vacation experience blending mindfulness,
personal growth and self-awareness programs with a full range of
personal services and recreational activities.

     In October 1989, the Company and certain officers of the Company
offered 2.5 million shares of common stock in an initial public
offering.  In June 1991, the Company and certain of its officers
offered 2.45 million shares of common stock in a secondary public
offering.  The Company's common stock trades on The Nasdaq Stock
Market under the symbol "NEXT".   The Company's principal offices are
located at 16600 N. Lago del Oro Parkway, Tucson, Arizona 85739, and
its telephone number is 520-818-5800.

     A special committee of the Board of Directors was appointed in
January 2001 to consider strategic options that may be available to
the Company, including a possible sale of the Company.  A proposal to
acquire the Company was received on January 24, 2001, from a group
that includes the Chief Executive Officer and a director, and later
received expressions of interest from other parties to purchase all
or certain parts of the Company.  Such proposals and indications of
interest are all subject to customary due diligence. The due
diligence process is currently ongoing.

Sierra Tucson

     Sierra Tucson is licensed by the State of Arizona as a 79-bed
inpatient, special psychiatric hospital and behavioral health care
center engaged in the treatment of addictions and mental health
disorders.  Sierra Tucson provides medical services and programs that
reach beyond standard alcohol and drug addiction treatments.  These
programs include the treatment of dual diagnosis, eating disorders,
major depression, post-traumatic stress disorder, and treatment for
gambling addictions, sexual disorders, obsessive compulsive disorder
and anxiety disorders.

     Sierra Tucson offers a safe, individualized treatment experience
based on the Sierra ModelTM, which was conceived and designed to
treat the whole person utilizing a bio-psycho-social-spiritual
approach.  The Sierra Model integrates philosophies and practices
from the medical and therapeutic communities, family systems theory

<PAGE>

and the Twelve Steps philosophy. Sierra Tucson's individualized
treatment plans are developed and maintained by experienced, clinical
professionals.  Every program at Sierra Tucson is shaped by the
philosophy of the Sierra Model, addressing both causes and symptoms,
thereby assuring the greatest possible chance for long-term recovery.
Since its inception, over 14,000 patients and nearly 37,000 family
members have participated in Sierra Tucson programs. Sierra Tucson is
licensed by the Arizona Department of Health Services and accredited
with commendation by the Joint Commission on Accreditation of
Healthcare Organizations.

     In order to facilitate its operations and strengthen its
identity as a separate and distinct business operation, on November
13, 1996, the business and assets of Sierra Tucson, Inc. ("STI") were
sold to ST, LLC, a subsidiary of the Company. The purchase is
evidenced by ST, LLC's non-negotiable promissory note which is
secured by a security interest in the assets of STI.  The Company is
the manager of and owns a 98% interest in ST, LLC; the remaining 2%
is owned by AP NH, LLC (a Delaware limited liability company), the
holder of the Company's Series A preferred stock as described below
in the Stockholders' Equity section of Notes to the Consolidated
Financial Statements.

Miraval

     Miraval, a luxury health resort and spa, combines elements of
mindfulness, personal growth, and self-awareness programs with a full
range of personal services and recreational activities.  By
incorporating educational programs such as mind/body and lifestyle
management, Miraval provides an innovative approach to managing the
pressures of everyday life.  Services and amenities are designed to
provide guests with unique skills to enhance wellness and to learn
enjoyable approaches for creating a sense of well being.  Guests are
provided with the opportunity to create a custom-tailored program
designed to meet their goals for stress prevention, relaxation,
health and fitness.  Programs offer both group and individual
participation with expert facilitators.  Miraval presently has 106
guest rooms.

     In August, 1998, as part of the debt refinancing loan agreement
with Lehman Brothers Holdings Inc., the business and assets of
Miraval were transferred to Healthstyles, Inc., a wholly-owned
subsidiary of the Company.

     The Company owns approximately 30 acres of land and buildings
north of Miraval ("North Campus"). The North Campus facilities, which
are currently vacant,  include nine separate buildings (approximately
41,700 square feet) that contain 30 casita-style rooms, group rooms,
a kitchen, dining room and other support facilities which, until mid-
1998, had been the site of Sierra Tucson.

Sources of Revenue

     The Company's revenue depends upon occupancy levels.  At Sierra
Tucson, an inclusive daily rate for services is charged, ranging from
$895 to $1,150 per day.  Patient revenue is derived from private
insurance reimbursement, contracts, and patient payments, none of
which, individually, represents a significant portion of revenue.
Most commercial insurance plans reimburse their subscribers or make
direct payment to Sierra Tucson. No revenue is derived from Medicare
or Medicaid.

     During 2000, 53% of patient revenue was derived from retail
payments and the remaining 47% from insurance, contracts and other
third party payors. In 1999, 54% of patient revenue came from
insurance, contracts and other third party payors.

     Miraval guest rates vary depending on season and market segment.
Peak season rates (October - Mid-June) start at $420 per person/per
day.  Off season (Mid-June - September) rates begin at $295 per
person/per day.  Group rates are available and vary depending on the
number of rooms and the season.  All rates are inclusive packages
consisting of luxury guest room, three gourmet meals, use of the
resort's amenities, participation in all group programs and
activities, one personal service per day, and Tucson Airport
transfers.  Average stays range from 3 to 7 nights.  Miraval
currently generates all of its revenue from guest bookings, group
bookings and retail sales of goods and services.

<PAGE>

Set forth below are the Company's total revenues by segment (000s):

<TABLE>
<CAPTION>
                                                Year Ended December 31,
                              --------------------------------------------------
                               2000     %       1999       %        1998      %
                               ----    ---      ----      ---      -----     ---
<S>                          <C>      <C>      <C>       <C>      <C>        <C>
Treatment Segment..........  $21,970  53.2     $16,842    55.5     $13,904    52.9
Health and Leisure Segment.   19,277  46.7      13,464    44.4      12,194    46.4
Other, net.................       45    .1          44      .1         186      .7
                             -------  ----     --------   ----     -------    -----
Total Revenue                $41,292 100.0     $30,350   100.0     $26,284   100.0
                             ======= =====     =======   =====     =======   ======
</TABLE>

Employees

     On December 31, 2000, the Company and its subsidiaries employed
approximately 380 full time equivalent employees. The Company's
businesses have not experienced material difficulty in recruiting and
retaining employees. The Company considers relations with employees
to be excellent.

Competition

     Sierra Tucson competes with psychiatric and behavioral health
hospitals as well as with other specialty residential facilities.
Non-profit or government-owned competitors may have certain financial
advantages such as endowments, charitable contributions and tax-
exempt financing not available to Sierra Tucson.  The Company
believes that the competitive position of Sierra Tucson is, to a
significant degree, dependent upon its reputation, historical success
in treating the patient, and price.  The Company also believes that
the competitive position of Sierra Tucson is dependent upon the
breadth of services offered by the facility and the ability to
implement programs best suited to the needs of patients and payors in
the marketplace.

     Miraval competes for national and international consumers'
discretionary income typically expended upon luxury hotel and resort
spas, holistic health and other related upscale vacation experiences.
While management believes that Miraval occupies a unique market
niche, it nevertheless competes with a broad spectrum of vacation
alternatives.  It has been categorized as a destination spa, creating
competition with a relatively small number of well-known spas whose
clients are very loyal.  It also competes with full-service resorts
for group business.  The criteria for competition is based on price,
amenities, program offerings and location.

Insurance

     The Company maintains professional malpractice liability
coverage for the professionals it employs in addition to coverage for
the customary risks inherent in the operation of health care and
resort facilities and business in general.  While the Company
believes its insurance policies are adequate in amount and coverage
for its current operations, there is no assurance that coverage will
continue to be available in adequate amounts or at a reasonable cost.

Licensing and Regulation

     The activities of Sierra Tucson are regulated by federal and
state governments.  Sierra Tucson holds a behavioral health
residential license from the State of Arizona to operate a mental
health and substance abuse facility and a special
hospital/psychiatric license from the State of Arizona to operate a
psychiatric hospital.

     Sierra Tucson is also accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO), a voluntary
national accrediting organization responsible for accrediting health
care providers.  JCAHO accreditation is important to the Sierra
Tucson operation as most insurance companies require such
accreditation in order for the treatment of patients to qualify for
insurance payment or reimbursement.  In 1999, Sierra Tucson was
reaccredited with commendation by the JCAHO for a three-year period,
the longest accreditation period available. The next scheduled survey
for Sierra Tucson by JCAHO is in May, 2002.

<PAGE>

     Both of the businesses operated by the Company are subject to
extensive state and local regulations and, on a periodic basis, must
obtain various licenses and permits.  Management believes that the
Company has obtained all required licenses and permits and its
businesses are conducted in substantial compliance with applicable
laws.

ITEM 2. PROPERTIES

     The Company's primary facilities are located on approximately
400 acres of owned or leased land northwest of Tucson, Arizona, in
the foothills of the Santa Catalina Mountains.

     The Sierra Tucson facilities are located on approximately 160
acres of land leased from the State of Arizona and in buildings
("Buildings") leased from a related party, ODE, L.L.C.  In October
1998, the Company entered into a 50-year Commercial Land Lease
Agreement ("State Land Lease") with the Arizona State Land
Department, which replaced a 10-year lease that would have expired in
2001. The Company amended its lease ("Building Lease") with ODE for
the Buildings to provide for a lease term which, when combined with
successive 10-year option renewals ("Renewal Options"), will coincide
with the State Land Lease. The rent for each Renewal Option is
subject to increase to the fair market rental of the Buildings. The
first Renewal Option commenced in March, 2001 and an agreement in
principle has been reached to increase the annual rent to $500,000
plus an annual increase based on the Consumer Price Index, not to
exceed 3% per annum. The annual rent for the Buildings is subject to
an increase for the term of each subsequent Renewal Option (if
exercised) based upon or determined by independent appraisal. The
facility also has fitness and recreation areas, riding stables and
other administrative and support offices.  In 1999, the Company
expanded the Sierra Tucson facilities through the addition of space
for sixteen beds and additional administrative offices.  In 2000,
construction was completed on a 4,220 square foot wing named Desert
Oasis.  The new area houses group rooms and medical records as well
as staff offices.  In addition, Sierra Tucson also renovated and
updated its fitness center in 2000.

     The Miraval facility was reconstructed from existing Company
facilities and is located on a separate Company-owned 130-acre parcel
of property.  The 30-acre parcel previously occupied by Sierra
Tucson, which is located just north of the Miraval property, is
currently vacant.  The remaining property, located to the south and
east of the Miraval facility, is unimproved open space, some of which
is unbuildable either because of its terrain or its location in the
flood plain.  Zoning for the property currently occupied by Miraval
and the adjacent 30-acre vacant parcel to the north permits a total
of 356 resort hotel rooms and up to 226 residential units.

     The Company's obligations under the debt refinancing loan
agreement with Lehman Brothers Holdings Inc., are secured by a first
lien against all real and personal property of Miraval and Sierra
Tucson.

ITEM 3. LEGAL PROCEEDINGS

     The Company is involved in various litigation and administrative
proceedings arising in the normal course of business.  In the opinion
of management, any liabilities that may result from these claims will
not, individually or in the aggregate, have a material adverse effect
on the Company's financial position, results of operations or cash
flows.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Company did not submit any matters to a vote of security
holders in the fourth quarter of the fiscal year ending December 31,
2000.

<PAGE>
                              PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

     The Company's common stock has been traded in the over-the-
counter market and quoted on The Nasdaq Stock Market since October
19, 1989.  Stock is traded under the symbol "NEXT".  As of March 1,
2001, there were approximately 204 shareholders of record and
approximately 1,490 beneficial holders of the Company's common stock.
The high and low sales price information set forth below, derived
from data prepared by The Nasdaq Stock Market, represents quotations
by dealers and may not reflect applicable markups, markdowns or
commissions, and do not necessarily represent actual transactions.

<TABLE>
<CAPTION>

                                   2000                       1999
                               -----------------       ------------------
                                High        Low         High         Low
                                ----        ---         ----         ---
<S>                           <C>         <C>          <C>         <C>
First Quarter                  $4.688      $1.250       $1.500      $1.000
Second Quarter                 $3.500      $2.000       $1.438      $0.719
Third Quarter                  $5.438      $2.281       $1.250      $0.906
Fourth Quarter                 $4.688      $2.375       $2.500      $0.938

</TABLE>

     On March 1, 2001 the closing bid price on The Nasdaq Stock
Market was $5.188 per share.

     The Company did not pay a cash dividend on its common stock in
2000 or 1999 and does not intend to pay any in the foreseeable
future.  Any future declaration and payment of dividends will be
determined by the Board of Directors based upon the conditions
existing at the time, including the Company's earnings, financial
condition, capital requirements, applicable legal restrictions and
other factors.  So long as any shares of preferred stock remain
outstanding, the Company may not declare or pay any cash dividend or
make any other distributions with respect to the common stock.

<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

     The following table sets forth selected consolidated financial
and operating data for the Company.  Certain prior year amounts have
been reclassified to conform to the presentation used in 2000.  The
data for the three years ended December 31, 2000, should be read in
conjunction with the Company's Consolidated Financial Statements
included elsewhere in this document.  The selected consolidated
financial and operating data for the two years ended December 31,
1997, is derived from the Company's historical Consolidated Financial
Statements.  See Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.  (000s, except per
share amounts and operating data.)

<TABLE>
<CAPTION>
                                            Year Ended December 31,
                                   2000     1999      1998      1997     1996
                                   ----     ----      ----      ----     ----
<S>                              <C>       <C>       <C>       <C>      <C>
Statement of Operations Data
Total revenue..................  $41,292    $30,350   $26,284   $20,652  $18,458
Income (loss) before
  extraordinary item...........    6,666      1,151   (   712)  ( 4,624) (14,693)
Extraordinary item.............       --         --   (   264)       --       --
                                  -------    ------   --------  --------  -------
Net income (loss) before
 income taxes..................    6,666      1,151   (   976)  ( 4,624) (14,693)
Provision for income tax.......      145         --        --        --       --
                                  -------    ------   --------  --------  -------
Net income (loss)..............    6,521      1,151   (   976)  ( 4,624) (14,693)
Basic net income (loss) per share:
 Before extraordinary item.....     0.76       0.13   (  0.08)  (  0.54) (   1.72)
 Extraordinary item............       --         --   (  0.03)       --        --
                                   ------    ------   --------  -------- ---------
 Net income (loss).............     0.76       0.13   (  0.11)  (  0.54) (   1.72)
Diluted net income (loss) per share:
 Before extraordinary item.....     0.47       0.09   (  0.08)  (  0.54)  (  1.72)
 Extraordinary item............       --         --   (  0.03)       --        --
                                   ------    ------   --------  --------  --------
 Net income (loss).............     0.47       0.09   (  0.11)  (  0.54)  (  1.72)

Cash Flow Data
Net cash provided by (used in)
 operating activities..........   10,344      4,515       523   ( 2,096)  ( 9,246)
Capital expenditures...........    1,412      1,415       862       948     1,124

Balance Sheet Data
Total Assets...................   48,784     39,831    37,815    39,011    41,666
Long-term Debt.................   12,587     12,724    12,815     9,730     8,359
Stockholders' Equity...........   28,650     21,995    20,829    21,805    22,179

Operating Data
Patient Days-Sierra Tucson.....   23,302     20,618    19,618    17,445    15,683
Average Daily Census...........       64         57        54        48        43
Guest Days-Miraval(1)..........   37,961     29,828    30,361    23,851    17,665
Room Occupancy - Miraval(1)....     65.3%      52.6%     53.7%     42.9%     33.6%
Participant Days-Onsite(2).....       --         --        --        --     7,073
Average Daily Census(2)........       --         --        --        --        21
Participant Days-HHHI(3).......       --         --        --        --     7,077
Average Daily Census(3)........       --         --        --        --        33

Financial Statistics
Current Ratio..................   2.23:1     1.27:1     .64:1     .35:1      .52:1
Days Outstanding in Accounts
  Receivable...................       15         17        20        27         44

</TABLE>
<PAGE>

(1)  Miraval was closed for two weeks in July, 1997 and for three
     weeks in July, 1998 due to seasonal occupancy fluctuation and
     to make needed improvements to the facility.
(2)  Onsite was acquired by the Company on January 2, 1995, and was
     divested on November 30, 1996.
(3)  Hilton Head Health Institute was acquired on March 1, 1996 and
     divested on October 1, 1996.


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
        AND RESULTS OF OPERATIONS

     The following discussion and analysis relates to factors which
have affected the consolidated financial condition and results of
operations of the Company for the three years ended December 31,
2000.  Certain prior year amounts have been reclassified to conform
to the presentation used in 2000.  Reference should also be made to
the Company's Consolidated Financial Statements and related notes
thereto and the Selected Financial Data included elsewhere in this
document.

General

     NextHealth, Inc. is a leading provider of a broad range of
alternative health care services which focus on prevention and self
care. For over 15 years, the Company has provided effective programs
and services which address individual wellness and quality-of-life
issues through a whole person, mind-body approach.

     The Company believes that it has positioned itself to capitalize
on the emerging health and leisure segment of the health care
services industry through the development of Miraval, a luxury health
resort and spa which provides a unique vacation experience blending
mindfulness, personal growth and self-awareness programs with a full
range of personal services and recreational activities. The Company
is also seeking additional opportunities to increase market share for
its existing Treatment segment, an inpatient, state licensed, special
psychiatric hospital and behavioral health care center providing
treatment for substance abuse and a broad range of mental health and
behavioral disorders.  In 1999, the Company expanded the Sierra
Tucson facilities through the addition of space for sixteen beds and
additional administrative offices.  For the year ended December 31,
2000, the Treatment segment accounted for approximately 53.2% of the
Company's operating revenues and approximately 39.8% of expenses,
while the Health and Leisure segment accounted for approximately
46.7% of the Company's operating revenue and approximately 52.6% of
operating expenses.

Results of Operations

Year Ended December 31, 2000 Compared to Year Ended December 31, 1999

     The significant changes in results of operations and net cash
provided by operating activities for the year ended December 31,
2000, compared to the same period in 1999 are discussed below.
Unless otherwise stated, all comparisons are for the same period.

     For the year ended December 31, 2000, net income increased to
$6.5 million, compared to $1.2 million in 1999; a $5.4 million
improvement.  Net cash provided by operating activities increased
$5.8 million to $10.3 million; a more than 129% improvement over the
previous year. The improvement in cash flow was primarily related to
funds from operations and advance deposit increases at Miraval.

     Total revenue increased $10.9 million to $41.3 million, an
increase of 36.1% when compared to 1999. The results reflect a 30.6%
net revenue improvement at Sierra Tucson and a 43.2% net revenue
improvement at Miraval. The growth in revenue was attributable to
increased census and rate at Sierra Tucson and increased occupancy
and rate at Miraval.

     Salaries and related benefits decreased 4.3% as a percentage of
revenue during 2000.  Salaries and related benefits increased 23.1%
to $16.7 million when compared to the same period in 1999.  The
increase was attributable to staffing adjustments related to
increased census at Sierra Tucson and higher occupancy at Miraval.

<PAGE>

     General and administrative expense decreased 5.2% as a
percentage of revenue during 2000. General and administrative expense
increased $2.1 million to $13.8 million when compared to the previous
year. The increase was related to professional expenses incurred
related to evaluation of strategic alternatives for the Company as
well as variable costs related to the increase in census and
occupancy.

     Interest expense increased 63.3% to $2.0 million compared to
$1.2 million for 1999. The increase reflects a $642,000 interest
expense charge for tentative settlement of a 1994 IRS audit.

     Depreciation and amortization expense decreased 20.6% to $2.1
million compared to $2.7 million in 1999. The decrease was primarily
related to certain equipment that became fully depreciated at
Miraval.

     The Company recognized pre-tax income of $6.7 million for the
year ended December 31, 2000.  A $145,000 provision for income taxes
was recorded during this period due to the existence of Alternative
Minimum Tax (AMT) requirements.  The Company continues to fully
reserve for the deferred tax assets of $10.7 million, which are
comprised primarily of net operating loss carryforwards, as of
December 31, 2000.  The Company intends to recognize the benefits of
deferred tax assets as the net operating loss carryforwards are
utilized.  However, management will continue to evaluate the
necessity of maintaining the valuation allowance in light of the
Company's profitability results for 2000 and expectations for 2001
and 2002.  The continuation of such positive trends in profitability
could allow management to appropriately reduce the valuation allowance
significantly and result in recognition of deferred tax assets on the
balance sheet perhaps in the latter part of 2001.

Year Ended December 31, 1999 Compared to Year Ended December 31, 1998

     The significant changes in results of operations and net cash
provided by operating activities for the year ended December 31, 1999,
compared to the same period in 1998 are discussed below.  Unless otherwise
stated, all comparisons are for the same period.

     For the year ended December 31, 1999, net income increased to $1.2
million, compared to a net loss of $976,000 in 1998; a $2.1 million
improvement. Net cash provided by operating activities increased $4.0
million to $4.5 million; a more than 700% improvement over the previous
year. The improvement in cash flow was related to the reduction in the
net loss and favorable changes in current liabilities related to
payables and advance deposits.

     Total revenue increased $4.1 million to $30.4 million, an increase
of 15.5% when compared to 1998.  The results reflect a 21.3% net revenue
improvement at Sierra Tucson and a 10.4% net revenue improvement at Miraval.
The growth in revenue was attributable to increased package rates and
a-la-carte utilization rates at Miraval and increased census revenue
at Sierra Tucson.

     Salaries and related benefits decreased 3.0% as a percentage of
revenue during 1999.  Salaries and related benefits increased 8.2%
to $13.6 million when compared to the same period in 1998.  The increase
was attributable to Miraval's remaining open during the month of July
1999, and to the increased facility size and increased census at Sierra
Tucson.

     General and administrative expense decreased 1.4% as a percentage
of revenue during 1999.  General and administrative expense increased
$1.2 million to $11.7 million when compared to the previous year.  The
increase was related to an increase in the allowance for doubtful
accounts for commercial insurance receivables as well as variable costs
related to the increase in revenues.

     Interest expense decreased $138,000 to $1.2 million or 10.2% when
compared to the previous year.  The decrease reflects the lower rate on
the loan outstanding in 1999 compared to the rate charged on the loan
outstanding in 1998.

     The Company recognized pre-tax income of $1.2 million for the year
ended December 31, 1999. There was no provision for income tax recognized
in 1999, as the Company's taxable income was fully offset by net
operating loss carryforwards not previously benefitted.

<PAGE>

Liquidity and Capital Resources

     In the last five years, the Company's primary sources of liquidity
and capital resources have been net cash provided by the operating
activities of both the Treatment and Health and Leisure segments, funds
generated from the sale of investments, proceeds from equity offerings,
and long-term and short-term borrowings.  Historically, these sources
have been sufficient to meet the needs and finance the operations and
growth of the Company's business.

     Net cash provided by the Treatment segment's operating activities
is primarily affected by census levels and net revenue per patient day.
This segment contributed positive cash flow to the Company's operations
in 2000.  In 2000, 53% of the Treatment segment's patient revenue was
derived from retail payments and the remaining 47% from insurance,
contracts and other third party payors.  In 1999, 54% of patient
revenue was derived from insurance, contracts and other third party
payors.  Based on current census levels and operating expenses,
Sierra Tucson believes that it will generate adequate cash flows to
sustain the Treatment segment's ongoing operational requirements and
to fund anticipated capital projects.

     The Company currently leases the Sierra Tucson buildings from a
related party, ODE, L.L.C.  The Company amended its lease ("Building
Lease") with ODE for the Buildings to provide for a lease term which,
when combined with successive 10-year option renewals ("Renewal Options"),
will coincide with the State Land Lease.  The rent for each Renewal
Option is subject to increase to the fair market rental of the Buildings.
The first Renewal Option commenced in March, 2001 and an agreement in
principle has been reached to increase the annual rent to $500,000
plus an annual increase based on the Consumer Price Index, not to
exceed 3% per annum.  The annual rent for the Buildings is subject to an
increase for the term of each subsequent Renewal Option (if exercised)
based upon or determined by independent appraisal.

     The Company's cash flow improved to net cash provided by operating
activities in 2000 of $10.3 million versus $4.5 million in 1999.  In
addition, the Company had net capital expenditures in 2000 of
approximately $1.4 million which were all funded from cash flow.

     Results in the Health and Leisure segment are primarily affected
by room occupancy and average daily rate in addition to expense
management.  In 2000, Miraval's room occupancy rate was approximately
65.3%.  Management believes that as marketplace demand for the Miraval
product continues to increase, the Health and Leisure segment will
ultimately make a significant contribution to the Company's financial
condition.  This segment contributed positive cash flow to the Company's
operations in 2000.

     On August 11, 1998, the Company's principal subsidiaries,
Healthstyles, Inc., and ST, LLC, completed a debt refinancing loan
agreement with Lehman Brothers Holdings Inc.  The amount available under
the agreement was $14 million, of which $2.0 million was reserved
for working capital ($1.0 million) and for capital improvements
($1.0 million).  $700,000 of the working capital portion was available
in 1998 and $300,000 in 1999.  As of December 31, 2000, $292,000 had
been drawn from the capital improvements reserve and $0 from the
working capital reserve.  The unused portion of the working capital
reserve rolled over to the capital improvements reserve at January
1, 2000.

     Proceeds from the Lehman transaction were primarily used to
extinguish existing mortgage debt with AP LOM, LLC, an affiliate of
AP NH, LLC ("APNH"), the holder of the Company's outstanding Series A
Preferred Stock.  The loan matures in September 2001. A one-year
extension is available upon payment of a 2% fee, and therefore, this
loan continues to be classified as long term.  It is management's
intent at the present time to extend the loan for an additional year.
The loan bears interest at the rate of 4% over the 30-day London
Interbank Offered Rate (LIBOR), adjusted monthly, and is payable
interest-only through maturity.  The LIBOR rate at the date of
closing was 5.65%.  The Company purchased a rate cap to protect
against extreme upward movement in the LIBOR rate which limits the
maximum rate to be paid by the Company to 10.5%.

     The loan is secured by a first lien against all real and
personal property of Miraval and Sierra Tucson.  It is also partially
guaranteed (to the extent of liability arising by reason of certain
exclusions to the non-recourse provisions of the loan) by the Company
and to a more limited extent by Apollo Real Estate Investment Fund II,
L.P. ("Apollo").  Apollo, an affiliate of APNH, received a fee in the
amount of $140,000 in consideration of its guarantee.

<PAGE>

     Management believes that funds from operations will provide the
cash necessary to meet its short-term capital needs.  Funds from the
Lehman transaction are also available if needed.  The Company must
continue to focus on revenue growth and expense controls in order to
preserve and improve its liquidity position.  Insufficient occupancy
levels at Miraval or any significant decrease in Sierra Tucson's
patient levels would adversely affect the Company's financial
position, results of operations and cash flows.

Business Outlook

     In the Treatment segment (Sierra Tucson), particular emphasis
will be placed on increasing awareness of Sierra Tucson's innovative
treatment programs through a combination of focused advertising,
direct mail, field sales, conference sponsorships and outbound
telemarketing campaigns.  In addition to continuing its traditional
marketing efforts to the referent therapist community and alumni,
Sierra Tucson will participate in various conferences and
professional boards and organizations.  Marketing field
representatives will continue their efforts to enhance Sierra
Tucson's national exposure and to increase the number of prospective
patients.

     Clinically, Sierra Tucson continually strives to refine its
programs.  In response to census increases, staffing adjustments have
been made to ensure high staff to patient ratios and to further
enhance the quality of the treatment experience.  Sierra Tucson
continues to incorporate new credible therapeutic techniques, and
based on a trend of higher acuity, assessment tools for higher risk
patients have been enhanced, ensuring a better clinical match.

     In July 1998, the Company relocated the Sierra Tucson operations
to the facilities previously used by the Company's adolescent care
unit (which ceased operations in 1993).  The facilities are located
on state leased land, and in October 1998, the Company entered into a
50-year Commercial Land Lease Agreement for the property with the
Arizona State Land Department.  In 1999, the Company expanded the
Sierra Tucson facilities through the addition of space for 16
additional beds as well as additional administrative offices. In
2000, construction was completed on a 4,220 square foot wing named
Desert Oasis.  The new area houses group rooms and medical records as
well as staff offices.  In addition, Sierra Tucson also renovated and
updated its fitness center in 2000.

     The Company currently leases the Sierra Tucson buildings from a
related party, ODE, L.L.C. The Company amended its lease ("Building
Lease") with ODE for the Buildings to provide for a lease term which,
when combined with successive 10-year option renewals ("Renewal
Options"), will coincide with the State Land Lease. The rent for each
Renewal Option is subject to increase to the fair market rental of
the Buildings. The first Renewal Option commenced in March, 2001 and
an agreement in principle has been reached to increase the annual
rent to $500,000 plus an annual increase based on the Consumer Price
Index, not to exceed 3% per annum. The annual rent for the Buildings
is subject to an increase for the term of each subsequent Renewal
Option (if exercised) based upon or determined by independent
appraisal.

     Miraval, the Company's health resort and spa, will continue its
focused sales efforts in targeted cities in 2001 and will also
continue to build national awareness by capitalizing on the media
support received in 2000.  In November 2000, Miraval was rated the
Top Spa in the Zagat Survey 2001 Top U.S. Hotels, Resorts & Spas.
Miraval received a rating of 29 out of a possible 30 in the Zagat
Survey rating system and was thus named the top stand-alone spa in
the United States. In September 2000, Miraval was named the #2 Best
Spa in America in Travel and Leisure's readers' poll.  In November
1999, Miraval was voted the #1 Spa in the World in the Conde Nast
Traveler's Readers' Poll, ahead of such competitors as Canyon Ranch,
the Lodge at Skylonda, Rancho La Puerta and Golden Door.  As part of
the same poll, Miraval was ranked Number 29 in the "Best of the Best"
among a world-wide combination of resorts, hotels, cruise lines,
islands, monuments, spas and cities.  Of the U.S. facilities listed
in the "Best of the Best", Miraval was the third highest.

     Miraval's affiliations with American Express Platinum and
Virtuoso have proved to be very successful and the
relationships will continue in 2001.  In addition, Miraval has
established itself with top corporate meeting planners and incentive
houses, and advanced group bookings continue to improve.  Miraval's
advertising campaign has remained solid and benefits have been
realized from sending a consistent message to the public. In addition
to developing relationships with online travel companies, Miraval has
launched its new web site which was developed to maximize and enhance
their presence on the world-wide web.

<PAGE>

     In 2001, Miraval will continue to focus on improving visibility
in the local market by attending charitable, convention and Chamber
of Commerce events. In addition, specialty programs will be evaluated
in an effort to improve occupancy during summer and shoulder seasons.

     Zoning for the property currently occupied by Miraval and the
property which is located to the north of Miraval permits a total of
356 resort hotel rooms and up to 226 residential units.

Factors That May Affect Future Results

     Management's Discussion and Analysis of Financial Condition and
Results of Operations (particularly as it relates to the growth of
the Health and Leisure segment) contains forward looking statements
within the meaning of the Private Securities Litigation Reform Act of
1995 that involve a number of risks and uncertainties.  While
management believes that such forward looking statements are accurate
as of the date hereof, the actual results and conditions could differ
materially from the statements contained herein.  The information
below should be read in conjunction with the Company's consolidated
financial statements and related notes thereto included elsewhere and
in other portions of this document.

     In addition, the following other factors could cause actual
results and conditions relating to liquidity and capital resources to
differ materially.

     The Company's Treatment segment participates in the highly
competitive mental and behavioral health industry, and faces
competition for market share resulting from aggressive pricing
practices and increasing competition from companies with greater
resources.  Some of these competitors have tax exempt, non-profit
status, are government subsidized or have endowment-related financial
support which may provide lower costs of capital.

     Sierra Tucson's operations are accredited by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO").
JCAHO accreditation is important to the operations of Sierra Tucson
since most insurance companies require such accreditation in order
for the treatment of patients to qualify for insurance payment or
reimbursement.  If Sierra Tucson were unable to maintain its JCAHO
accreditation, its business would be adversely affected. Sierra
Tucson successfully completed its JCAHO review in May 1999 by
receiving accreditation with commendation. The next scheduled review
by JCAHO will be in May 2002.

     The Sierra Tucson buildings are currently leased from a related
party, ODE, L.L.C. The Company amended its lease ("Building Lease")
with ODE for the Buildings to provide for a lease term which, when
combined with successive 10-year option renewals ("Renewal Options"),
will coincide with the State Land Lease. The rent for each Renewal
Option is subject to increase to the fair market rental of the
Buildings. The first Renewal Option commenced in March, 2001 and an
agreement in principle has been reached to increase the annual rent
to $500,000 plus an annual increase based on the Consumer Price
Index, not to exceed 3% per annum. The annual rent for the Buildings
is subject to an increase for the term of each subsequent Renewal
Option (if exercised) based upon or determined by independent
appraisal.

     Miraval's unique blending of luxury resort recreational
activities with stress management and self-awareness programs clearly
differentiates it from the spas with which it competes.  Because
Miraval represents a benchmark for the new and growing trend in
hospitality for lifestyle enhancing products, market data in this
niche cannot easily be ascertained. Due to Miraval's relatively short
history and the uniqueness of its programs and services, the Company
cannot project with a high degree of accuracy the future levels of
occupancy or revenue.  While the Company believes that there is
strong consumer demand for Miraval's products and services, the
historical data does not exist in this market niche to be certain the
demand will continue.

     While management believes that Miraval occupies a unique market
niche, it nevertheless competes in the resort hotel/spa industry.
Currently, its competitors have greater name recognition as well as
long-standing relationships with travel agents and meeting planners.
Market share must be obtained from competitors and from introducing
new customers to the benefits of the Miraval product.  Longevity in
the marketplace plays a key role in attaining credibility in this
highly competitive field.  Management cannot anticipate what impact
this will have on future occupancy levels.

<PAGE>

     While the Company anticipates continued growth in revenues and
is committed to increased profitability, operating results could be
adversely impacted if the business is unable to accurately anticipate
customer demand, is unable to differentiate its products from those
of its competitors, is unable to offer services expeditiously in
response to customer demand, or is negatively impacted by managed
care restrictions on payor reimbursement.

ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     The Company is subject to interest rate risk as it relates to
the loan from Lehman Brothers Holdings Inc., which bears interest at
4% over the 30-day London Interbank Offered Rate (LIBOR), adjusted
monthly.  To limit its exposure under this variable-rate agreement,
the Company purchased a rate cap to protect against an extreme upward
movement in the LIBOR rate during the scheduled three-year term of
the loan.  The rate cap limits the maximum rate to be paid by the
Company to 10.5%.  The effective rate for the Company at December 31,
2000 was 10.500%.  A 100 basis point change in the LIBOR rate in 2001
would result in a $120,000 change in interest expense incurred by the
Company in that year.

<PAGE>

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

             Index to Consolidated Financial Statements

NextHealth, Inc.'s Consolidated Financial Statements as of December
31, 2000 and 1999 and for the three years ended December 31, 2000.

                                                                 Page

     Report of Management                                         16

     Report of Independent Auditors                               17

     Consolidated Balance Sheets                                  18

     Consolidated Statements of Operations                        19

     Consolidated Statements of Cash Flows                        20

     Consolidated Statements of Changes in Stockholders' Equity   21

     Notes to Consolidated Financial Statements                   22

<PAGE>
                        REPORT OF MANAGEMENT


The financial statements and other financial information included in
this Annual Report on Form 10-K are the responsibility of management.
The financial statements have been prepared in conformity with
generally accepted accounting principles appropriate in the
circumstances and include amounts that are based on management's
informed judgments and estimates.

Management relies on the Company's system of internal accounting
controls to provide reasonable assurance that assets are safeguarded
and that transactions are properly recorded and executed in
accordance with management's authorization.  The concept of
reasonable assurance is based on the recognition that there are
inherent limitations in all systems of internal accounting control
and that the cost of such systems should not exceed the benefits to
be derived.  The internal accounting controls in place during the
periods presented are considered adequate to provide such assurance.

The Company's financial statements are audited by Ernst & Young LLP,
independent auditors.  Their report states that they have conducted
their audit in accordance with auditing standards generally accepted
in the United States. These standards include an evaluation of the
system of internal accounting controls for the purpose of
establishing the scope of audit testing necessary to allow them to
render an independent professional opinion on the fairness of the
Company's financial statements.

The Audit Committee of the Board of Directors, composed solely of
directors who are not employees of the Company, reviews the Company's
financial reporting and accounting practices.  The Audit Committee
meets periodically with the independent auditors and management to
review the work of each and to ensure that each is properly
discharging its responsibilities.


 /s/ William T. O'Donnell, Jr.
------------------------------
William T. O'Donnell, Jr.
President and Chief Executive Officer



 /s/ Loree Thompson
------------------------------
Loree Thompson
Chief Financial Officer

<PAGE>

                   REPORT OF INDEPENDENT AUDITORS



Board of Directors and Stockholders
NextHealth, Inc.


We have audited the accompanying consolidated balance sheets of
NextHealth, Inc. and subsidiaries, as of December 31, 2000 and 1999,
and the related consolidated statements of operations, changes in
stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 2000.  Our audits also included the
financial statement schedule listed in the index at Item 14(a).
These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements and schedule based on our audits.

We conducted our audits in accordance with auditing standards
generally accepted in the United States.  Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the
overall financial statement presentation.  We believe that our audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the consolidated
financial position of NextHealth, Inc. and subsidiaries, at December
31, 2000 and 1999, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally
accepted in the United States.  Also, in our opinion, the related
financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly in all
material respects the information therein.



                                              /s/ Ernst & Young LLP
                                             ----------------------
                                             ERNST & YOUNG LLP
Tucson, Arizona
January 26, 2001

<PAGE>


                 NEXTHEALTH, INC. AND SUBSIDIARIES
                    CONSOLIDATED BALANCE SHEETS
                    (000s, except share amounts)
<TABLE>
<CAPTION>
                                                            December 31,
                                                        -------------------
                                                          2000        1999
                                                          ----        ----
<S>                                                    <C>          <C>
Assets
Current Assets:
  Cash and equivalents...............................   $ 12,737     $  3,803
  Accounts receivable, less allowance for doubtful
   accounts of $368 and $337, respectively...........      1,467        1,174
  Prepaid expenses...................................        701          438
  Other current assets...............................        708          573
                                                         --------    ---------
    Total current assets.............................     15,613        5,988

Property and equipment, net..........................     32,871       33,327
Long-term receivables, less allowance for doubtful
 accounts of $21 and $21, respectively...............         64           64
Intangible assets, less amortization of $527
 and $310, respectively..............................        214          431
Other assets.........................................         22           21
                                                        ---------    ---------
   Total assets......................................   $ 48,784      $ 39,831
                                                        =========    =========
Liabilities and Stockholders' Equity
Current Liabilities:
  Accounts payable, trade............................   $  1,192      $    888
  Accrued expenses and other liabilities.............      5,808         3,835
                                                        ---------    ---------
   Total current liabilities.........................      7,000         4,723

Long-term debt and financing obligation..............     12,587        12,724
                                                        ---------    ---------
   Total liabilities.................................     19,587        17,447

Minority Interest....................................        547           389

Stockholders' Equity:
Preferred stock-undesignated, $.01 par value,
 3,924,979 shares authorized; no shares outstanding..         --            --
Preferred stock-Series A, $.01 par value, 46,065
 shares authorized; 46,065 shares outstanding at
 December 31, 2000 and 1999..........................         --            --
Common stock, $.01 par value, 16,000,000 shares
 authorized; 8,623,513 shares outstanding at
 December 31, 2000, and 8,554,938 shares outstanding
 at December 31, 1999................................         86            86
Additional paid-in capital...........................     48,146        48,012
Accumulated deficit..................................    (19,582)      (26,103)
                                                         --------      --------
   Total stockholders' equity........................     28,650        21,995
                                                         --------      --------
   Total liabilities and stockholders' equity........    $48,784       $39,831
                                                         ========      ========
</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF OPERATIONS
             (000s, except share and per share amounts)
<TABLE>
<CAPTION>

                                                   Year Ended December 31,
                                           ----------------------------------
                                              2000        1999        1998
                                              ----        ----        ----
<S>                                        <C>          <C>          <C>
Revenue:
 Net operating revenue..................    $40,834      $30,229      $26,058
 Investment income......................        433           80           75
 Other revenue..........................         25           41          151
                                            --------     --------    ---------
   Total revenue........................     41,292       30,350       26,284

Operating expenses:
 Salaries and related benefits..........     16,707       13,573       12,550
 General and administrative.............     13,800       11,719       10,505
 Interest...............................      1,978        1,211        1,349
 Depreciation and amortization..........      2,141        2,696        2,592
                                           ---------     --------    ---------
   Total operating expenses.............     34,626       29,199       26,996
                                           ---------     --------    ---------
Income (loss) before extraordinary item.      6,666        1,151     (    712)
Extraordinary item......................         --           --     (    264)
                                           ---------     --------    ---------
Income (loss) before income taxes.......      6,666        1,151     (    976)

Provision for income taxes..............        145           --           --
                                           ---------     --------    ---------
Net income (loss).......................   $  6,521      $ 1,151    $(    976)
                                           =========     ========   ==========
Basic income (loss) per share:
  Before extraordinary item.............   $   0.76      $  0.13    $(   0.08)
  Extraordinary item....................         --           --     (   0.03)
                                           ---------     --------   ----------
  Net income (loss).....................   $   0.76      $  0.13    $(   0.11)
                                           =========     ========   ==========
Diluted income (loss) per share:
  Before extraordinary item.............   $   0.47      $  0.09    $(   0.08)
  Extraordinary item....................         --           --     (   0.03)
                                           ---------     --------   ----------
  Net income (loss).....................   $   0.47      $  0.09    $(   0.11)
                                           =========     ========   ==========
Shares used in basic per
 share calculation......................  8,623,513     8,554,938    8,554,938
                                          =========     =========    =========
Shares used in diluted per
 share calculation...................... 13,867,378    13,187,119    8,554,938
                                         ==========    ==========    =========
</TABLE>


The accompanying notes are an integral part of these financial statements.

<PAGE>
                 NEXTHEALTH, INC. AND SUBSIDIARIES
               CONSOLIDATED STATEMENTS OF CASH FLOWS
                               (000s)
<TABLE>
<CAPTION>
                                                     Year Ended December 31,
                                               --------------------------------
                                               2000           1999        1998
                                               ----           ----        ----
<S>                                           <C>           <C>         <C>
Cash flows from operating activities:
 Net income (loss).........................    $ 6,521      $ 1,151       $(   976)
 Adjustments to reconcile net income (loss) to
  net cash provided by operating activities:
   Depreciation and amortization...........      2,141        2,696          2,657
   Loss on early extinguishment of debt....         --           --            264
   Charge for non-employee options.........          4           15             --
   Provision for deferred income taxes.....    (     5)          --             --
   Provision for bad debts.................        139          370            159
   Minority interest.......................        158           87             54
   Interest expense........................        642           --             --
Changes in operating assets and liabilities
 net of effects from acquisitions:
 Increase in assets:
   Accounts receivable.....................    (   432)     (   518)       (   110)
   Other assets............................    (   407)     (   145)       (   676)
 Increase (decrease) in liabilities:
   Accounts payable, accrued expenses and
    other liabilities......................      1,583          859        (   849)
                                               --------     --------      ---------
Net cash provided by
 operating activities......................     10,344        4,515            523

Cash flows from investing activities:
 Purchase of property and equipment........    ( 1,412)    (  1,405)       (   862)
                                               --------    ---------      ---------
Net cash used in investing activities......    ( 1,412)    (  1,405)       (   862)

Cash flows from financing activities:
 Proceeds from long-term borrowing.........         --           --         12,292
 Proceeds from sale of stock...............        130           --             --
 Reduction of long-term debt and
  financing obligation.....................    (   128)    (    150)       (11,939)
                                              ---------    ---------      ---------
Net cash provided by (used in)
 financing activities......................          2     (    150)           353
                                              ---------    ---------      ---------
Net increase in cash and equivalents.......      8,934        2,960             14

Cash and equivalents, beginning of year....      3,803          843            829
                                              ---------    ---------      ---------
Cash and equivalents, end of year..........   $ 12,737     $  3,803       $    843
                                              =========    =========      =========
</TABLE>


The accompanying notes are an integral part of these financial statements.

<PAGE>

                NEXTHEALTH, INC. AND SUBSIDIARIES
    CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                   (000s, except share amounts)
<TABLE>
<CAPTION>
                                                                        Total
                                              Additional                Stock-
                              Common Stock      Paid-in  (Accumulated   holders'
                             Cost     Shares    Capital    Deficit)      Equity
                             ----     ------  ----------  -----------  ---------
<S>                         <C>    <C>         <C>         <C>         <C>
Balance at January 1, 1998   $ 86   8,554,938   $47,997    $(26,278)     $21,805

Net loss for the year          --         --         --     (   976)     (   976)
                             ----   ---------   --------   ---------     --------
Balance at December 31, 1998   86   8,554,938    47,997     (27,254)      20,829

Net income for the year        --          --        --       1,151        1,151

Issuance of non-employee
 vested options                --          --        15          --           15
                             ----   ---------   --------   ---------     --------
Balance at December 31,1999    86   8,554,938    48,012     (26,103)      21,995

Net income for the year        --          --        --       6,521        6,521

Sale of Common Stock           --      68,575       130          --          130

Issuance of non-employee
 vested options                --          --         4         --             4
                             ----   ---------   --------  ----------    ---------
Balance at December 31,2000  $ 86   8,623,513   $48,146   $ (19,582)     $28,650
                             ====   =========   ========  ==========    =========

</TABLE>

The accompanying notes are an integral part of these financial statements.

<PAGE>

                     NEXTHEALTH, INC. AND SUBSIDIARIES
                 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (000s, except share and per share amounts)
                            December 31, 2000

ORGANIZATION

NextHealth, Inc. and subsidiaries (collectively, the "Company") have
operations in two principal business segments; Treatment, and Health
and Leisure through which it provides both health care and wellness
and preventive health services.  The Treatment segment includes
Sierra Tucson, LLC  ("Sierra Tucson"), an inpatient, state licensed,
special psychiatric hospital and behavioral health care center
providing treatment for substance abuse and a broad range of mental
health and behavioral disorders. The Health and Leisure segment,
Sierra Health-Styles, Inc. d/b/a Miraval ("Miraval"), is a luxury
health resort and spa which provides a unique vacation experience
blending mindfulness, personal growth and self-awareness programs
with a full range of personal services and recreational activities.
The current operations of the Company are located in Tucson, Arizona.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Principles of Consolidation

The consolidated financial statements include the accounts of
NextHealth, Inc. and its subsidiaries, all but one of which is wholly
owned.  All intercompany accounts and transactions have been
eliminated in consolidation.

     Use of Estimates

The preparation of the financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.

     Cash and Equivalents

Cash and equivalents includes all cash balances and highly liquid
investments with an original maturity of three months or less.  Cash
and equivalents are stated at cost which approximates market value.

     Advertising Expense

The cost of advertising is expensed as incurred.  The Company
incurred approximately $1,150, $885, and $833 in advertising costs
during 2000, 1999 and 1998, respectively.

      Intangible Assets

Intangible assets include capitalized loan fees which are being
amortized over the life of the loan and ground water rights which are
being amortized over a period of 15 years.  Intangible assets of $142
were written off in 1998 as a result of the Lehman refinancing (see
note entitled Long-term Debt and Financing Obligation) and included
in the 1998 extraordinary charge.

     Property and Equipment

Property and equipment are stated at cost.  Interest incurred during
the construction of facilities is capitalized and amortized over the
life of the asset. Costs of improvements are capitalized. Costs of
normal repairs and maintenance are charged to expense as incurred.
Upon the sale or retirement of property and equipment, the cost and
related accumulated depreciation are removed from the respective
accounts, and the resulting gain or loss, if any, is included in
income.  Depreciation is provided on a straight-line basis over the
estimated useful lives of the assets. The service lives of the
Company's property and equipment ranges from 3 to 39 years.

<PAGE>

             NEXTHEALTH, INC. AND SUBSIDIARIES
         NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
          (000s, except share and per share amounts)
                      December 31, 2000

     Income Taxes

The company accounts for income taxes using the liability method in
accordance with Statement of Financial Accounting Standards (SFAS)
No. 109, Accounting for Income Taxes.

     Revenue Recognition

Revenue, net of any applicable contractual allowances or discounts,
is recognized in the period services are rendered.

     Net Operating Revenue

Net operating revenue consists of revenue derived from guests and
patients, based on the billing rates established for each business
segment, less any applicable discounts or contractual allowances.

     Stock Based Compensation

The Company grants employee stock options for a fixed number of
shares with an exercise price equal to or greater than the fair value
of the shares at the date of grant.  The Company accounts for stock
option grants in accordance with APB Opinion No. 25, Accounting for
Stock Issued to Employees (APB 25) and related Interpretations
because the Company believes the alternative fair value accounting
provided for under FASB Statement No. 123, Accounting for Stock-Based
Compensation, requires the use of option valuation models that were
not developed for use in valuing employee stock options.  Under APB
25, because the exercise price of the valuing employee stock options
equals or exceeds the market price of the underlying stock on the
date of grant, no compensation expense is recognized.  Options
granted to non-employees are recorded at fair value on the date of
grant.

     Net Income (Loss) Per Share

The following table sets forth the components of the share figure
used in the computation of basic and diluted earnings per share:

<TABLE>
<CAPTION>
                                           2000         1999          1998
                                           ----         ----          ----
<S>                                     <C>         <C>            <C>
     Basic:
       Weighted average shares.......    8,623,513    8,554,938     8,554,938

    Effect of dilutive securities:
       Stock options.................      328,345       25,681            --
       Preferred stock...............    4,606,500    4,606,500            --
       Warrants......................      309,020           --            --
                                         ---------    ---------     ----------
       Diluted Shares................   13,867,378   13,187,119     8,554,938
                                        ==========   ==========     ==========
</TABLE>

Diluted earnings per share are equal to basic earnings per share for
the period ending December 31, 1998, as the effect of all applicable
securities is anti-dilutive (decrease the loss per share amount).

     Credit Risk

A significant portion of the Company's accounts receivable are due
from individuals (self-pay), insurance companies, other entities
which provided health care benefits, and credit card companies.
Management performs credit evaluations and believes its allowance for
doubtful accounts is adequate.

<PAGE>


                 NEXTHEALTH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (000s, except share and per share amounts)
                        December 31, 2000

     New Accounting Standards

In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, (FAS 133),
"Accounting for Derivative Instruments and Hedging Activities."  This
statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities.
In July 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, which deferred
the effective date of FAS 133 for one year.  In June 2000, the
Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 138, (FAS 138), "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an amendment
to FASB Statement No. 133."  This statement amended certain
provisions of FAS 133.  Accordingly, the Company will adopt FAS 133,
as amended by FAS 138, effective the first quarter of fiscal 2001.
Management is evaluating what effect this statement may have on the
Company's financial statements.

     Reclassifications

The consolidated financial statements for prior years reflect
certain reclassifications to conform with the classifications
adopted in 2000.

PROPERTY AND EQUIPMENT

Property and equipment at December 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                         2000               1999
                                         ----               ----
<S>                                    <C>               <C>
Land and improvements...........         $  3,413         $  2,930
Buildings and improvements......           35,871           36,210
Furniture and equipment.........           11,211           10,127
                                         --------         --------
Total property and equipment....           50,495           49,267

Less: accumulated depreciation
 and amortization...............           17,624           15,940
                                         --------         --------
Total property and
 equipment, net.................         $ 32,871          $33,327
                                         ========         ========
</TABLE>

ACCRUED EXPENSES AND OTHER LIABILITIES

At December 31, 2000 and 1999, accrued expenses and other liabilities
were comprised of the following:

<TABLE>
<CAPTION>
                                          2000            1999
                                          ----            ----
<S>                                     <C>             <C>
Payroll and related taxes............    $  905          $  734
Professional fees....................       314              60
Deposits and patient refunds.........     2,362           1,580
Reimbursement liability..............     1,573           1,018
Current portion of financing obligation     108              99
Other................................       546             344
                                         ------         -------
Total accrued expenses and
  other liabilities..................    $5,808          $3,835
                                         ======         =======
</TABLE>

<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (000s, except share and per share amounts)
                        December 31, 2000


LONG-TERM DEBT AND FINANCING OBLIGATION

Long-term debt and financing obligation at December 31, 2000 and 1999
are as follows:

<TABLE>
<CAPTION>
                                                   2000           1999
                                                   ----           ----
<S>                                              <C>            <C>
Secured debt, interest rate of 30-day LIBOR
 + 4%, matures September 1, 2001............      $12,292        $12,292
Financing obligation........................          380            495
Other.......................................           23             36
                                                  -------        -------
                                                   12,695         12,823
Less: current portion.......................          108             99
                                                  -------        -------
Total long-term debt and financing
   obligation...............................      $12,587        $12,724
                                                  =======        =======
</TABLE>

In August 1998, the Company's principal subsidiaries, Miraval and
Sierra Tucson, completed a debt refinancing loan agreement with
Lehman Brothers Holdings Inc. The amount of the three-year loan was
$14,000, of which $2,000 was reserved for working capital ($1,000)
and for capital improvements ($1,000).  $700 of the working capital
portion was available in 1998 and $300 in 1999. As of December 31,
2000, $292 had been drawn from the capital improvements reserve and
$0 from the working capital reserve. The unused portion of the
working capital reserve rolled over to the capital improvements
reserve at January 1, 2000.  Proceeds from the transaction were also
used to extinguish existing mortgage debt with AP LOM, LLC, an
affiliate of AP NH, LLC ("APNH"), the holder of the Company's
outstanding Series A Preferred Stock. The loan bears interest at the
rate of 4% over the 30-day London Interbank Offered Rate (LIBOR),
adjusted monthly, and is payable interest-only through maturity.  The
maturity date may be extended by one year upon payment of a 2% fee,
and therefore, this loan continues to be classified as long term. It
is management's intent at the present time to extend the loan for an
additional year. The fair value of the debt financing loan agreement
approximates its carrying value given it bears interest at a variable
rate and matures in the near term.  The Company purchased a rate cap
to protect against extreme upward movement in the LIBOR rate; the
maximum rate to be paid by the Company is 10.5%, while the rate at
December 31, 2000 was 10.625%. The loan agreement contains various
operational and financial restrictions including restrictions on
additional debt without the lender's approval.  At December 31, 2000,
the Company was in compliance with all such operational and financial
restrictions.

The debt refinancing loan agreement is secured by a first lien
against all real and personal property of Miraval and Sierra Tucson.
It is also partially guaranteed (to the extent of liability arising
by reason of certain exclusions to the non-recourse provisions of the
loan) by the Company and to a more limited extent by Apollo Real
Estate Investment Fund II, L.P. ("Apollo").  Apollo, an affiliate of
APNH, received a fee in the amount of $140 in consideration of its
guarantee.

In November 1996, the Company entered into a secured loan agreement
with AP LOM, LLC an affiliate of Apollo Real Estate Advisors, L.P. in
the amount of $13,090 contemporaneously with the issuance of
preferred stock to this entity. The above-mentioned debt refinancing
loan agreement extinguished the debt portion of the Apollo loan;
however, Apollo retained its equity position. In 1998, an
extraordinary charge to earnings of $264 occurred due to the early
extinguishment of this long-term debt as a result of the Lehman debt
refinancing arrangement.

In December 1994, the Company sold a facility for $1,000 (the
facility's appraised value) to ODE, L.L.C., an entity controlled by
the Chairman of the Company's Board of Directors.  The Company
simultaneously leased this facility for a term of seven years, at an
annual cost of $150, payable in quarterly installments. This
transaction has been accounted for as a financing as a result of the
Company's continuing involvement with the facility. The Company
amended its lease ("Building Lease") with ODE for the Buildings to
provide for a lease term which, when combined with successive 10-year
option renewals ("Renewal Options"), will coincide with the State
Land Lease. The rent for

<PAGE>

                NEXTHEALTH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (000s, except share and per share amounts)
                        December 31, 2000


each Renewal Option is subject to increase to the fair market rental
of the Buildings. The first Renewal Option commenced in March, 2001
and an agreement in principle has been reached to increase the annual
rent to $500 plus an annual increase based on the Consumer Price
Index, not to exceed 3% per annum. The annual rent for the Buildings
is subject to an increase for the term of each subsequent Renewal
Option (if exercised) based upon or determined by independent
appraisal.

Future maturities of long-term debt and financing obligation at
December 31, 2000 are as follows:

<TABLE>
<CAPTION>

<S>                   <C>
 2001............      $    108
 2002............        12,432
 2003............           155
                       --------
                       $ 12,695
                       ========
</TABLE>

For years ended December 31, 2000, 1999 and 1998, interest paid was
$1,978, $1,211 and $1,471,  respectively. The amount recorded in 2000
includes a charge of $642 for tentative settlement of a 1994 IRS
audit.

BUSINESS SEGMENT AND OTHER OPERATING DATA

The Company's business is organized on a services basis, and the
Company's Chief Operating Decision Maker (the Company's Chairman,
President and Chief Executive Officer) assesses performance and
allocates resources on this basis.  The information provided in the
following section is representative of the information used by the
Chief Operating Decision Maker in deciding how to allocate resources
and in assessing performance.

The Company operates in two principal business segments; Treatment,
and Health and Leisure (the Segments) through which it provides both
health care and wellness and preventive health services.  The
Segments are located in and derive all their revenues from their
facilities in Tucson, Arizona. The Treatment Segment is an inpatient,
state licensed, special psychiatric hospital and behavioral health
care center providing treatment for substance abuse and a broad range
of mental health and behavioral disorders.  Substantially all
revenues in this Segment result from inpatient charges, therapy,
professional fees, and pharmacy charges.  The Health and Leisure
Segment consists of a luxury health resort and spa which provides a
unique vacation experience blending mindfulness, personal growth and
self-awareness programs with a full range of personal services and
recreational activities. Substantially all revenues in this Segment
result from guest bookings, group bookings and retail sales of goods
and services.

The Company's Chief Operating Decision Maker evaluates performance
and allocates resources based on pretax income (loss).  The
accounting policies of the Segments are the same as those described
in the Summary of Significant Accounting Policies.  There are no
material sales between the Segments, although fixed assets are
occasionally transferred between Segments at net book value on the
transfer date.  Corporate activity benefiting the Company as a whole
is separately identified below.  No single customer accounted for
more than 10% of either Segment's revenue in 2000, 1999 or 1998.

<PAGE>

               NEXTHEALTH, INC. AND SUBSIDIARIES
            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
            (000s, except share and per share amounts)
                        December 31, 2000

Information about the Company's operations in different business
segments for the years ended December 31, 2000, 1999 and 1998 is as
follows:

<TABLE>
<CAPTION>
                                                       Corporate
                                           Health &       and
                                Treatment   Leisure   Other Items   Consolidated
                                ---------  --------   -----------   ------------
<S>                             <C>        <C>        <C>           <C>
2000
----------------------------
Total revenue.................   $21,970    $ 19,277   $    45        $ 41,292
Income (loss) before
 income tax benefit...........     8,200       1,058    (2,592)          6,666
Identifiable assets...........    14,166      32,896     1,722          48,784
Capital expenditures and
 intersegment transfers, net..       860         560    (    8)          1,412
Depreciation & amortization
 expense......................       377       1,748        16           2,141
Interest expense..............       852         483       643           1,978

1999
----------------------------
Total revenue.................   $16,842     $13,464   $    44        $ 30,350
Income (loss) before
 income tax benefit...........     4,924    (  2,604)   (1,169)          1,151
Identifiable assets...........     7,372      30,646     1,813          39,831
Capital expenditures and
 intersegment transfers, net..     1,053         380    (   28)          1,405
Depreciation & amortization
 expense......................       334       2,344        18           2,696
Interest expense..............       772         435         4           1,211

1998
----------------------------
Total revenue.................   $13,904     $12,194   $   186        $ 26,284
Income (loss) before
 extraordinary item...........     3,801    (  2,541)  ( 1,972)       (    712)
Extraordinary item............        --          --   (   264)       (    264)
Net income (loss).............     3,801    (  2,541)  ( 2,236)       (    976)
Identifiable assets...........     4,111      32,129     1,575          37,815
Capital expenditures and
 intersegment transfers, net..  (  1,878)      4,370   ( 1,630)            862
Depreciation & amortization
 expense......................       325       2,092       175           2,592
Interest expense..............       308         165       876           1,349

</TABLE>

<PAGE>

                  NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000

STOCKHOLDERS' EQUITY

Preferred Stock

In November 1996, the Company's Board of Directors created two series
of Preferred Stock ("Series A" and "Series B").  The Company
authorized 46,065 shares of Series A stock and 28,956 shares of
Series B stock.  At December 31, 1996, 17,109 shares of Series A and
28,956 shares of Series B were outstanding and classified as
mandatorily redeemable preferred stock in the balance sheet.  The
Series B Preferred Stock was converted into Series A Preferred Stock
on January 29, 1997.  The mandatory redemption provisions applicable
to the outstanding preferred stock were extinguished as a result of
this conversion, therefore, the amounts received from the sale of
such stock are classified as equity in the accompanying consolidated
balance sheets.  At December 31, 2000 and 1999, 46,065 shares of
Series A are outstanding.  A total of approximately 5,200,000 shares
of common stock have been reserved for conversion of preferred stock
and exercise of warrants held by the preferred shareholder.
Significant terms and conditions of the Preferred Stock are described
in the following paragraphs.

The holders of Series A stock are not entitled to receive dividends
except upon an event of default, in which event the dividend rate on
the Series A Preferred Stock will be 18% per annum.  So long as any
shares of Preferred Stock remain outstanding, the Company may not
declare or pay any cash dividend or make any other distributions with
respect to the Common Stock.

In the event of any liquidation, dissolution or winding-up of the
Company, the holders of Preferred Stock shall be entitled to a
liquidation preference over the holders of Common Stock in the amount
of any accrued but unpaid dividends.  There are no other liquidation
preferences.

The holders of Series A stock are entitled to vote on all matters
presented to the Company's stockholders for a vote and, except with
respect to the election of Directors, each share of Series A stock
entitles the holder thereof to such number of votes per share as
equals the number of shares of the Common Stock into which such
shares of Series A stock is then convertible.  Initially, each share
of Series A stock is convertible into 100 shares of Common Stock. In
addition, the holders of Series A stock are entitled to vote
separately as a separate class on all matters other than the election
of directors.  This means that matters submitted for a vote of the
stockholders of the Company must receive the approval of the
requisite percentage of the holders of Common Stock (with the holders
of Series A stock being entitled to vote on an "as converted" basis)
as well as of the holders of the Series A stock.  In addition, the
holders of Series A stock, as a class, are entitled to elect three
directors to the Company's Board of Directors ("Preferred
Directors").  In the event of a default, the holders of Series A
stock become entitled to elect a majority of the Company's Board of
Directors.  The Preferred Stock became redeemable at any time after
January 1, 2001, at $92.26 per share (issuance price).

The Company issued a total of 600,000 warrants in 1996 which are
exercisable into 600,000 common shares at an exercise price of $1.50
(recently adjusted to $1.00 pursuant to the agreement).  These
warrants are exercisable through November 13, 2006.  The fair
value of the warrants at issuance date was credited to additional
paid-in capital.

Stock Option Plans

At December 31, 2000, 1,993,000 shares of common stock were reserved
for the exercise of options under the Company's 1992 and 1990 stock
option plans.  The 1990 employee stock option plan expired in October
2000. No additional option shares may be issued from this plan.
Options to purchase shares of common stock are granted with an
exercise price equal to or greater than the fair market value on the
dates of grant, and are exercisable over periods ranging from three
to ten years.  Options may be exercised in installments generally
commencing one year after the dates of grant.  All options become
fully vested upon the acquisition of the Company or a merger in which
the Company is not the surviving entity.

<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000

In 1993, the Company established a Non-Employee Director Stock Option
Plan (the "DSO Plan"), which provides for the automatic granting of
fully vested options to purchase shares of common stock to members of
the Board of Directors who are not employees of the Company.  At
December 31, 2000, 600,000 shares of common stock were reserved for
issuance under the DSO Plan.

The fair value of these options was estimated at the dates of grant
using a Black-Scholes option pricing model with the following
assumptions for 2000, 1999 and 1998, respectively: risk-free interest
rates ranging from 5.94% to 6.64%, 4.73% to 6.01%, and 4.52% to
5.69%, respectively; dividend yields of 0.0%; volatility factor of
the expected market price of the Company's common stock of .753 for
2000 and .639 for 1999 and 1998; and an expected life of an option of
5 years.

The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable.  In addition, option
valuation models require the use of highly subjective assumptions
including the expected stock price volatility.  Because the Company's
employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide
a reliable single measure of the fair value of its employee stock
options.

SFAS No. 123 requires the Company to present pro forma disclosure for
options granted subsequent to 1995.  These disclosures are not
indicative of future amounts, as options granted prior to 1996 have
not been included as provided by SFAS No. 123.  For purposes of pro
forma disclosures, the estimated fair value of stock options was
amortized to expense over the vesting period.  Pro forma net income
(loss) and income (loss) per share are as follows:

<TABLE>
<CAPTION>

                          2000          1999            1998
                          ----          ----            ----
<S>                     <C>           <C>             <C>
Net Income (loss):
  As reported.........   $  6,521       $ 1,151       $(  976)
  Pro forma...........      6,416           918        (1,142)

Basic income (loss)
 per share:
  As reported.........   $   0.76       $  0.13       $( 0.11)
  Pro forma...........       0.74          0.11        ( 0.13)

Diluted income (loss)
 per share:
  As reported.........   $   0.47       $  0.09      $(  0.11)
  Pro forma...........       0.46          0.07       (  0.13)

</TABLE>
<PAGE>
                 NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000


The following table summarizes the cumulative activity under the
Company's stock option plans:

<TABLE>
<CAPTION>
                               Options        Fully       Option Price      Weighted Avg.
                             Outstanding  Vested Options Range (Per Share)  Exercise Price
                             -----------  -------------- -----------------  --------------
<S>                          <C>          <C>            <C>                 <C>

Balance at January 1, 1998     1,154,709     936,812      $ 1.25 - $6.00        $3.57
Granted                          238,300                    1.00 -  2.00         1.31
Canceled                        (309,584)                   1.25 -  6.00         3.29
Exercised                             --                             --            --
                               ----------    --------     --------------       -------

Balance at December 31, 1998   1,083,425     898,972        1.00 -  6.00         3.15
Granted                          326,250                    1.00 -  1.50         1.38
Canceled                       (  61,350)                   1.00 -  5.75         2.77
Exercised                             --                              --           --
                               ----------    --------     ---------------      --------

Balance at December 31, 1999   1,348,325    1,069,303       1.00 -  6.00         2.74
Granted                           92,500                    1.34 -  3.75         2.03
Canceled                       ( 139,950)                   1.00 -  4.88         3.47
Exercised                      (  68,575)                   1.00 -  3.25         1.91
                               ----------   ----------    ---------------      --------
Balance at December 31, 2000   1,232,300    1,078,890      $1.00 - $6.00        $2.65
                               ==========   ==========    ===============      ========
</TABLE>

In 2000, 15,000 shares were granted with an exercise price above
market price on the date of grant. The weighted average fair value of
options granted with an exercise price above market price on the date
of grant during 2000 was $1.45.  No options were granted in 1999 or
1998 with an exercise price above market price on the dates of grant.
The weighted average fair value of options granted with an exercise
price equal to market price on the dates of grant during 2000, 1999
and 1998 was $1.13, $.81, and $.77, respectively.  The remaining
average contractual life for options outstanding as of December 31,
2000, was 5.90 years.  The weighted average exercise price for
exercisable options was $2.87, $3.04, and $3.35, at December 31,
2000, 1999 and 1998, respectively.

<PAGE>

                NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000

INCOME TAXES

Deferred income tax assets and liabilities are determined based upon
differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.

The components of the income tax provision are as follows:

<TABLE>
<CAPTION>
                       Years ended December 31,
                   2000        1999           1998
                   --------------------------------
<S>                <C>        <C>           <C>
  Current:
       Federal       $ 125      $ --          $ --
       State            20        --            --

  Deferred           $  --      $ --          $ --
                   --------------------------------
                     $ 145      $ --          $ --
                   ================================
</TABLE>

Deferred income taxes reflect the net tax effects of temporary
differences between the carrying value of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes.  The components of the deferred tax assets, all noncurrent,
at December 31, 2000 and 1999 are as follows:

<TABLE>
<CAPTION>
                                           2000          1999
                                           ----          ----
<S>                                      <C>           <C>
Capitalized business expansion costs...   $    38       $   547
Tax basis of fixed assets in excess of
   book basis..........................     1,553         1,726
Non-deductible reserves................       408           551
Accrued interest.......................       257            --
State net operating loss carryforward..     1,090         1,439
Federal net operating loss carryforward     6,992         8,192
Minimum tax credit.....................       383           258
Other, net.............................        --            45
                                          --------      --------
Total deferred tax assets..............    10,721        12,758
Valuation allowance....................   (10,721)      (12,758)
                                          --------      --------
Net deferred tax assets................   $    --       $    --
                                          ========      ========
</TABLE>

The valuation allowance decreased by $2,037 during the year primarily
as a result of the Company utilizing certain net operating losses.

At December 31, 2000, the Company had approximately $20,500 and
$18,000 of federal and state net operating loss carryforwards,
respectively, which expire for federal purposes during the years 2011
through 2018 and for state purposes during the years 2000 through
2005.  In addition, at December 31, 2000, the Company has
approximately $383 in Alternative Minimum Tax Credits for federal tax
purposes which do not expire.

<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000

The differences between the income tax benefit at the statutory rate
and the actual income tax benefit is as follows:
<TABLE>
<CAPTION>

                                             2000          1999        1998
                                             ----          ----        ----
<S>                                         <C>           <C>         <C>
Federal tax expense at the statutory rate..   34.0 %        34.0 %     (34.0)%
State taxes................................    0.4            --          --
AMT........................................    1.9            --          --
Utilization of net operating losses........  (34.0)        (34.0)       34.0
                                             ------        ------       -----
Effective income tax rate..................    2.3 %         0.0 %       0.0 %
</TABLE>

Federal income tax payments of $120 and $30 were made during the
years ending December 31, 2000 and 1999, respectively.  No payments
were made in the year ending December 31, 1998.

OPERATING LEASES

The Company leases land, vehicles and equipment under operating
leases.  Future annual minimum lease payments under noncancelable
operating leases at December 31, 2000, are as follows:

     2001        $     287
     2002              284
     2003              278
     2004              294
     2005              290
     Thereafter     13,768
                 ---------
                 $  15,201
                 =========

Future payments under the land lease increase as the number of beds
operated by Sierra Tucson increases in accordance with the levels
specified in the agreement and by a fixed percentage (10%) every five
years.  Total rental expense recognized under operating leases for
2000, 1999 and 1998, was $423, $374, and $355, respectively.

EMPLOYEE RETIREMENT PLAN

The Company has a defined contribution plan that provides for
discretionary employer contributions and for optional employee
contributions which are matched by the Company at a maximum rate of
50% of the employees' contributions up to amounts prescribed by law.
All employees who meet minimum age and service requirements are
eligible to participate in the plan.  It is the Company's policy to
fund plan contributions as accrued. For 2000, 1999 and 1998, employer
matching and discretionary contributions to the plan were
approximately  $174, $160, and $143, respectively.

RELATED PARTY TRANSACTIONS

A member of the Company's Board of Directors is a member of an asset
management firm that provided management and financial services to
the Company in 1999 and 1998.  Fees paid for services in 1999 and
1998 were $60, and $84, respectively.  Management believes such fees
are reasonable and comparable to those of other institutions
providing similar services.

The Company leases a facility from an entity controlled by the
President and CEO of the Company and Chairman of the Company's Board
of Directors. See note entitled Long-Term Debt and Financing
Obligation for additional information.

<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             (000s, except share and per share amounts)
                         December 31, 2000

An entity controlled by the President and CEO of the Company and
Chairman of the Company's Board of Directors provided consulting
services to the Company; in 2000 and 1999 total fees of $262, and
$267,  respectively, were paid to that entity.  Of the $262 paid in
2000, $200 was a Compensation Committee approved bonus.  Of the $267
paid in 1999, $100 was a Compensation Committee approved bonus for
1997 and 1998, and $100 was a Compensation Committee approved bonus
for 1999.

A member of the Company's Board of Directors is a member of a law
firm which represents the Company on real estate and transactional
issues; total fees of $119 and $51 were paid to that firm in 2000 and
1999, respectively.

Effective October 1, 1996, the Company sold HHHI to the former
President and CEO of the Company for an amount which equaled the
Company's purchase price plus advances to that subsidiary from the
purchase through disposition date.  The Company agreed to indemnify
the related party for up to $130 upon resale of the HHHI real
property to an unaffiliated third party. The Company will receive up
to $130, after agreed upon deductions, in the event of a gain on the
sale of the property.

CONTINGENCIES

The Company is involved in various litigation and administrative
proceedings arising in the normal course of business.  In the opinion
of management, any liabilities that may result from these claims will
not, individually or in the aggregate, have a material adverse effect
on the Company's financial position, results of operations or cash
flows.

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

The following table summarizes certain quarterly financial data:

<TABLE>
<CAPTION>
                                             Income
                                             (Loss)            Net Income (loss)
                                             Before     Net      Per Share of
                           Total  Operating  Income    Income    Common Stock
                          Revenue  Expenses   Tax      (Loss)  Basic     Diluted
                          -------  --------  ------   -------  -----    --------
<S>                      <C>      <C>       <C>       <C>      <C>      <C>
2000 Quarter ended:
 March 31.............    $10,770  $ 8,176   $ 2,594   $ 2,594  $0.30      $0.18
 June 30..............     10,518    8,266     2,252     2,155   0.25       0.15
 September 30.........      9,403    8,499       904       886   0.10       0.06
 December 31..........     10,601    9,685       916       886   0.10       0.06

1999 Quarter ended:
 March 31.............    $ 8,137  $ 7,161   $   976   $   976  $0.11      $0.07
 June 30..............      7,627    7,226       401       401   0.05       0.03
 September 30.........      6,650    7,079   (   429)   (  429) (0.05)     (0.05)
 December 31..........      7,936    7,733       203       203   0.02       0.02

</TABLE>


ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
         AND FINANCIAL DISCLOSURE

  None.

<PAGE>


                               PART III



ITEM 10.   DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


ITEM 11.   EXECUTIVE COMPENSATION


ITEM 12.   SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT


ITEM 13.   CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Pursuant to instruction G(3) to Form 10-K, Items 10, 11, 12 and
13 are omitted because the Company will file a definitive proxy
statement (the "Proxy Statement") pursuant to Regulation 14A under
the Securities Exchange Act of 1934 no later than 120 days after the
close of the fiscal year.  The information required by such items
will be included in the definitive proxy statement to be so filed for
the Company's annual meeting of stockholders which has not yet been
scheduled, or by amendment to this Form 10K.

<PAGE>

                              PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)    The following documents are filed as part of this report:

         (1) Financial Statements:

             Reference is made to the listing on page 15 for a list
             of all financial statements filed as a part of
             this report.

         (2) Financial Statement Schedules.  The following financial
             statement schedules are required by Item 14(d).  All other
             schedules are omitted because they are not applicable, or not
             required, or because the required information is included in
             the consolidated financial statements or notes thereto.

             Schedule II. Valuation and Qualifying Accounts

         (3) Exhibits.  The following exhibits are incorporated by reference
             as indicated or are filed as part of this Annual Report on
             Form 10-K:
<TABLE>
<CAPTION>
                                                                        Sequentially
Exhibit                                                                   Numbered
Number                      Document                                       Page
-------   ------------------------------------                           ---------
<S>     <C>                                                              <C>

  3.1    Certificate of Incorporation                                        (1)

  3.2    Amended Restated By-Laws                                            (5)

  4.1    Specimen Common Stock Certificate                                   (1)

  4.2    Certificate of Designation, Preferences and Rights of the           (11)
         Convertible Preferred Stock, Series A and Cumulative Preferred
         Stock, Series B of NextHealth, Inc.

10.26    Stock Bonus and Repurchase Agreement, dated November 18,1988,       (1)
         between John H. Schmitz and Rita F. Schmitz and Sierra
         Tucson/Properties, Inc., as amended on August 31, 1989

10.33    1989 Stock Option Plan                                              (1)

10.47    1990 Stock Option Plan                                              (2)

10.49    Commercial lease dated as of March 15, 1991, between the            (3)
         State of Arizona and Sierra Tucson AC, Inc., relating to
         lease of Adolescent Care facility site

10.51    Form of Indemnity Agreement*                                        (4)

10.53    1992 Stock Option Plan                                              (3)

10.54    Non-Employee Directors Stock Option Plan                            (5)

10.56    Real Estate Sale Agreement and industrial Building Lease for        (6)
         Sierra Tucson AC, Inc. Adolescent Center dated December 28, 1994,
         and December 29, 1994, respectively.

10.57    Onsite Training and Consulting, Inc. Stock Purchase                 (6)
         Agreement dated January 13, 1995

<PAGE>

10.58    Severance Agreement, General Release, Covenant Not to Sue           (6)
         between the Company and William T. O'Donnell, Jr., dated
         January 20, 1995

10.59    Elements of compensation - Wayne M. Morrison, Vice President/Chief  (7)
         Financial Officer

10.60    Note Payable between NextHealth, Inc. and Sundt Corporation         (8)
         dated April 10, 1996 (without exhibits)

10.61    Asset Purchase Agreement by and among NextHealth, Inc. and          (8)
         Hilton Head Health Institute, Inc. dated February 29, 1996
         (without exhibits)

10.62    Amendment 1 to Note Payable between NextHealth, Inc. and            (9)
         Sundt Corporation dated June 28, 1996

10.63    Loan Agreement between NextHealth, Inc. and Mortgages, Ltd.         (9)
         dated June 25, 1996 (without exhibits)

10.64    Secured Promissory Note between NextHealth, Inc. and                (9)
         Mortgages, Ltd. dated June 25, 1996

10.65    Deed of Trust, Assignment of Rents and Security Agreement           (9)
         between NextHealth, Inc. and Mortgages, Ltd. dated June 25, 1996

10.66    Security Agreement between Sierra Tucson, Inc. and Mortgages, Ltd.  (9)
         dated June 25,1996 (without exhibits)

10.67    Security Agreement between Sierra Healthstyles, Inc. and            (9)
         Mortgages, Ltd. dated June 25, 1996 (without exhibits)

10.68    Guaranty between Sierra Tucson, Inc. and Mortgages, Ltd.            (9)
         dated June 25, 1996

10.69    Guaranty between Sierra Healthstyles, Inc. and Mortgages,           (9)
         Ltd. dated June 25, 1996

10.70    Asset Purchase Agreement between Sierra Tucson, Inc. and            (10)
         Soften Realty, LLC

10.71    Operating Agreement of Soften Realty, Inc. between                  (10)
         NextHealth, Inc. and AP NH, LLC

10.72    Security Agreement between Sierra Tucson, Inc. and Soften           (10)
         Realty, LLC

10.73    Non-negotiable Security Promissory Note                             (10)

10.74    Assumption agreement                                                (10)

10.75    Bill of Sale and Assignment between Sierra Tucson, Inc. and         (10)
         Soften Realty, LLC

10.76    Preferred Stock and Warrant Purchase Agreement between              (10)
         NextHealth, Inc. and AP LOM LLC

10.77    Registration and Pre-emptive Rights Agreement between               (10)
         NextHealth, Inc. and AP LOM LLC

10.78    Credit Agreement between NextHealth, Inc. and AP LOM LLC            (10)
<PAGE>

10.79    Pledge Agreement between NextHealth, Inc. and AP LOM LLC            (10)

10.80    Term Note A between NextHealth, Inc. and AP LOM, LLC                (11)

10.81    Term Note B between NextHealth, Inc. and AP LOM, LLC                (11)

10.82    Warrant for 500,000 shares of Common Stock                          (11)

10.83    Deed of Trust for the use and benefit of AP LOM, LLC                (11)

10.84    Guaranty made by NextHealth's subsidiaries                          (11)

10.85    General Security Agreement among NextHealth's subsidiaries          (11)
         and AP LOM, LLC

10.86    Loan Agreement made by Sierra Health-Styles, Inc., and              (12)
         Sierra Tucson, LLC in favor of Lehman Brothers Holdings Inc.

10.87    Mortgage Note made by Sierra Health-Styles, Inc., and Sierra        (12)
         Tucson, LLC in favor of Lehman Brothers Holdings Inc.

10.88    Commercial long-term lease dated October 23, 1998, between          (13)
         the State of Arizona State Land Department and Sierra
         Tucson, L.L.C. relating to the Sierra Tucson site.

10.89     Amended and Restated First Amendment to Lease, dated March         (14)
          15, 2000, between ODE, L.L.C and Sierra Tucson, L.L.C.
          relating to the Sierra Tucson buildings.

21.1     Subsidiaries                                                         41

23.1     Consent of Ernst & Young LLP, Independent Auditors                   42

(1)      Incorporated by reference from Company's Form S-1
         Registration Statement, File No. 33-31020, declared effective in
         October 1989.

(2)      Incorporated by reference from the Company's Form 10-K for
         the year ended December 31, 1990.

(3)      Incorporated by reference from the Company's Form 10-Q for
         the year ended March 31, 1991.

(4)      Incorporated by reference from the Company's Form S-1
         Registration Statement declared effective on June 20, 1991.

(5)      Incorporated by reference from the Company's Form 10-K for
         the year ended December 31, 1992.

(6)      Incorporated by reference from the Company's Form 10-K for
         the year ended December 31, 1994.

(7)      Incorporated by reference from the Company's Form 10-K for
         the year ended December 31, 1995.

(8)      Incorporated by reference from the Company's Form 10-Q for
         the quarter ended March 31, 1996.

(9)      Incorporated by reference from the Company's Form 10-Q for the
         quarter ended June 30, 1996.

(10)     Incorporated by reference from the Company's Form 10-Q/A
         No. 1 for the quarter ended September 30, 1996.
<PAGE>

(11)    Incorporated by reference from the Company's Form 10-Q/A No. 2
        for the quarter ended September 30, 1996.

(12)    Incorporated by reference from the Company's Form 10-Q/A No. 1
        for the quarter ended June 30, 1998.

(13)    Incorporated by reference from the Company's Form 10-K for the
        year ended December 31, 1998.

(14)    Incorporated by reference from the Company's Form 10-K for
        the year ended December 31, 1999.

*       The Company has entered into indemnification agreements
        with certain of its directors, one of whom is an executive
        officer, and certain former directors.  Pursuant to the
        Instructions accompanying Item 601 of Regulation S-K, the
        Company has not filed each such indemnification agreement.

(b)     Reports on Form 8-K.  None.

(c)     Exhibits Required by Item 601 of Regulation S-K.  See (a)(3)
        above.
</TABLE>
<PAGE>

                                Signatures

         Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                                     NEXTHEALTH, INC.

Dated: March 16, 2001                BY: /s/ William T. O'Donnell, Jr.
                                        -------------------------------
                                           WILLIAM T. O'DONNELL, JR.
                                           President and Chief
                                            Executive Officer

         Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.

<TABLE>
<CAPTION>

Signature                        Capacity                                 Date
---------                        --------                                 ----
<S>                             <C>                                      <C>
/s/ William T. O'Donnell, Jr.    Chairman of the Board of Directors       March 16, 2001
-----------------------------    President and Chief Executive Officer
William T. O'Donnell, Jr.        (Principal Executive Officer)

/s/ Neil E. Jenkins              Director                                 March 16, 2001
-----------------------------
Neil E. Jenkins


/s/ George L. Ruff               Director                                 March 16, 2001
-----------------------------
George L. Ruff


/s/ Stephen L. Berger            Director                               March 16, 2001
-----------------------------
Stephen L. Berger


/s/ Lee S. Neibart               Director                               March 16, 2001
-----------------------------
Lee S. Neibart


/s/ Michael L. Ashner            Director                               March 16, 2001
-----------------------------
Michael L. Ashner


/s/ Alfred Trivilino             Director                               March 16, 2001
-----------------------------
Alfred Trivilino


/s/ Loree Thompson              (Chief Financial Officer)               March 16, 2001
-----------------------------
Loree Thompson

</TABLE>
<PAGE>

                 NEXTHEALTH, INC. AND SUBSIDIARIES
          SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                               (000s)
<TABLE>
<CAPTION>

    Column A                   Column B       Column C     Column D       Column E
    --------                   --------       --------     --------       --------
                                              Additions
                               Balance at    (Charged to                 Balance at
                              Beginning of    Costs and                    End of
    Description                 Period        Expenses)   Deductions        Period
    -----------               ------------   -----------  ----------      ---------
<S>                             <C>           <C>         <C>             <C>

Year ended December 31, 2000:    $  358        $  139       $ 108          $  389
   Allowance for doubtful        ======        ======       =====          ======
   accounts

Year ended December 31, 1999:
   Allowance for doubtful
   accounts                      $  278        $  370       $ 290         $  358
                                 ======        ======       =====         ======
Year ended December 31, 1998:
   Allowance for doubtful
   accounts                      $  348        $  159       $ 229         $  278
                                 ======        ======       =====         ======
</TABLE>
<PAGE>


                            Exhibit 21.1

                          NEXTHEALTH, INC.
                        Subsidiary Schedule
<TABLE>
<CAPTION>

Subsidiaries                  State of Incorporation        Doing Business As
------------                  ----------------------        -----------------
<S>                           <C>                           <C>

Sierra Tucson, LLC                 Delaware                    Sierra Tucson

Sierra Health-Styles, Inc.         Delaware                    Miraval

Sierra Tucson Educational          Arizona
 Materials, Inc. (STEM)

NextHealth Water Resources,Inc.    Arizona

Sierra Tucson AC, Inc.(STAC)       Arizona

Miraval Service Corporation,Inc.   Arizona

Onsite Workshops, Inc. (inactive)  Arizona

The NextHealth Institute, Inc.     Arizona
(inactive)

NextHealth.com, L.L.C. (inactive)  Delaware
</TABLE>
<PAGE>


                            Exhibit 23.1

         Consent of Ernst & Young LLP, Independent Auditors


We consent to the incorporation by reference in the Registration
Statement (Form S-8 No. 33-44620, and Form S-8 No. 333-43416)
pertaining to the Sierra Tucson Companies, Inc., 1992 Stock Option
Plan and in the Registration Statement (Form S-8 No. 33-38608)
pertaining to the Sierra Tucson Companies, Inc., 1990 Stock Option
Plan and in the Registration Statement (Form S-8 No. 333-43418)
pertaining to the NextHealth, Inc. Non-Employee Directors Stock
Option Plan of our report dated January 26, 2001, with respect to the
consolidated financial statements and schedule of the Company
included in the Annual Report (Form 10-K) for the year ended December
31, 2000.



                                              /s/ Ernst & Young LLP
                                             -----------------------
                                             ERNST & YOUNG LLP
Tucson, Arizona
March 9, 2001